INTERNATIONAL MONETARY FUND

(IMF)

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• The International Monetary Fund (IMF) is an
organization of 189 countries, working to:
• foster global monetary cooperation,
• secure financial stability,
• facilitate international trade,
• promote high employment and sustainable
economic growth, and
• reduce poverty around the world.
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• Background:
• During the Great Depression of the 1930s,
countries attempted to shore up their failing
economies by:
sharply raising barriers to foreign trade;
devaluing their currencies to compete against
each other for export markets; and,
curtailing their citizens' freedom to hold foreign
exchange.
• These attempts proved to be self-defeating.
• World trade declined sharply and employment
and living standards plummeted in many
countries.

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• This breakdown in international monetary
cooperation led the IMF's founders to plan an
institution charged with overseeing the
international monetary system
• A system of exchange rates and international
payments that enables countries and their
citizens to buy goods and services from each
other.
• The new global entity would ensure exchange
rate stability and encourage its member countries
to eliminate exchange restrictions that hindered
trade.
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 Quick Details
• Formation: Adopted: July 22, 1944 (1944-07-22)
(72 years ago)
Entered into force: December 27, 1945 (1945-12-
27) (71 years ago)
• Type: International Economic Organization
• Headquarters: Washington, D.C.
• Membership: 189 nations (to date)
• Official languages: English, French, and Spanish
• Managing Director: Christine Lagarde
• Main organ: Board of Governors

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 Issues in the Membership of IMF

• All members of the IMF are also members of the

World Bank.
• Some countries have chequered membership
history:
- The former Czechoslovakia was expelled in
1954 for "failing to provide required data" and
was readmitted in 1990, after the Velvet
Revolution.
- Poland withdrew in 1950—allegedly
pressured by the Soviet Union— but returned in
1986.
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• Former members are Cuba (which left in
1964) and the Republic of China, which was
ejected from the UN in 1980 after losing the
support of then U.S. President Jimmy Carter
and was replaced by the People’s Republic of
China. However, "Taiwan Province of China" is
still listed in the official IMF indices.
• Apart from Cuba, the other states that do not
belong to the IMF are North Korea, Andorra,
Monaco, Liechtenstein, Nauru, Cook Islands,
Niue, Vatican City.
• Kosovo has limited recognition

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• Mission of IMF
• The IMF’s fundamental mission is to ensure the stability of
the international monetary system.
• It does so in three ways: keeping track of the global
economy and the economies of member countries; lending
to countries with balance of payments difficulties; and
giving practical help to members.

• 1) Surveillance
• The IMF oversees the international monetary system and
monitors the economic and financial policies of its 189
member countries.
• As part of this process, which takes place both at the global
level and in individual countries, the IMF highlights possible
risks to stability and advises on needed policy adjustments.

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• 2) Lending
• A core responsibility of the IMF is to provide loans to member
countries experiencing actual or potential balance of payments
problems.
• This financial assistance enables countries to rebuild their
international reserves, stabilize their currencies, continue paying for
imports, and restore conditions for strong economic growth, while
undertaking policies to correct underlying problems.
• Unlike development banks, the IMF does not lend for specific
projects.

• 3) Capacity Development
• IMF capacity development—technical assistance and training—
helps member countries design and implement economic policies
that foster stability and growth by strengthening their institutional
capacity and skills. The IMF seeks to build on synergies between
technical assistance and training to maximize their effectiveness.

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IMF Governance Structure

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 Operational Modalities of the IMF
Board of Governors (BOG)
• The highest decision-making body of the IMF.
• It consists of one governor and one alternate governor
for each member country. The governor is appointed
by the member country and is usually the Minister of
Finance or the Head of the Central Bank.
• While the BOG has delegated most of its powers to the
IMF’s Executive Board, it retains the right to approve
quota increases, special drawing right (SDR)
allocations, the admittance of new members,
compulsory withdrawal of members, and
amendments to the Articles of Agreement and By-
Laws.

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• The BOG also elects or appoints Executive Directors
and is the ultimate arbiter on issues related to the
interpretation of the IMF’s Articles of Agreement.
• Voting by the BOG may take place either by holding a
meeting or remotely (through the use of courier
services, electronic mail, facsimile, or the IMF’s secure
online voting system).
• The Boards of Governors of the IMF and the World
Bank Group normally meet once a year, during the
IMF-World Bank Annual Meetings, to discuss the work
of their respective institutions.
• The Annual Meetings, which take place in September
or October, have customarily been held in Washington
for two consecutive years and in another member
country in the third year.
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 Ministerial Committees
• The Board of Governors is advised by two
ministerial committees, the International
Monetary and Financial Committee (IMFC) and
the Development Committee.
• The IMFC has 24 members, drawn from the pool
of 189 governors, and represents all member
countries. Its structure mirrors that of the
Executive Board and its 24 constituencies.
• The IMFC meets twice a year, during the IMF-
World Bank Spring and Annual Meetings. The
Committee discusses matters of common
concern affecting the global economy and also
advises the IMF on the direction of its work.

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• At the end of each meeting, the Committee issues a
joint communiqué summarizing its views. These
communiqués provide guidance for the IMF’s work
program during the six months leading up to the next
Spring or Annual Meetings. The IMFC operates by
consensus and does not conduct formal votes.
• The Development Committee is a joint committee,
tasked with advising the Boards of Governors of the
IMF and the World Bank on issues related to economic
development in emerging and developing countries.
The committee has 25 members (usually ministers of
finance or development).
• It represents the full membership of the IMF and the
World Bank and mainly serves as a forum for building
intergovernmental consensus on critical development
issues.

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 The Executive Board

• The IMF’s 24-member Executive Board conducts the

daily business of the IMF.
• The current configuration of the Board dates from
1992, following the expansion of the IMF’s
membership to include many former Soviet Union
countries.
• Five Executive Directors are appointed by the
member countries holding the five largest quotas
(currently the United States, Japan, Germany,
France, and the United Kingdom), and 19 are elected
by the remaining member countries.
• Under reforms currently being finalized, all 24
Directors will be elected by the member countries,
starting in 2012.
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• The Board discusses all aspects of the Fund’s
work, from the IMF staff's annual health
checks of member countries' economies to
policy issues relevant to the global economy.
• The board normally makes decisions based on
consensus, but sometimes formal votes are
taken.
• At the end of most formal discussions, the
Board issues what is known as a Summing Up,
which summarizes its views.
• Informal discussions may be held to discuss
complex policy issues at a preliminary stage.

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IMF Management
• The IMF’s Managing Director is both chairman of the IMF’s
Executive Board and Head of IMF staff.
• The Managing Director is assisted by four Deputy Managing
Directors.
• The Managing Director is appointed by the Executive Board
for a renewable term of five years.
• The IMF’s Governors and Executive Directors may nominate
nationals of any of the Fund’s member countries.
• Although the Executive Board may select a Managing
Director by a majority of votes cast, the Board has in the
past made such appointments by consensus.
• For the 2011 selection, the Executive Board adopted a
procedure that allowed the selection of the next Managing
Director to take place in an open, merit-based, and
transparent manner. The Executive Board adopted the
same procedure to govern the 2016 selection.

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 IMF Reform Initiatives
• Governance Reform
• In order to be effective and legitimate, the IMF must be
seen as representing the interests of all of its 189
member countries. Reform of the IMF’s governance
structure is currently under way in response to rapid
changes in the global economy that have seen large
emerging market countries take on greater importance.
• Reform of the IMF’s governance began in earnest in
2006, when a process to realign members’ quotas and
voting power received the backing of the membership.
• The 2008 quota and voice reform—which provides for
ad hoc quota increases for a group of dynamic
emerging market countries, as well as measures to
enhance the voice of low-income countries—became
effective on March 3, 2011.
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• In October 2009, the IMF’s policy steering committee,
the International Monetary and Financial Committee,
endorsed a call by G-20 leaders to aim for an even
more ambitious reform effort, while protecting the
voting share of the poorest member countries. On
December 15, 2010, the IMF Board of Governors
approved the 14th General Review of Quotas which
will double members’ quotas and will result in a further
shift of more than 6 percentage points in quota share
to dynamic emerging and developing countries,
exceeding what the IMFC had called for.
• Further, there was also agreement to preserve the
gains in the voting power of the poorest member
countries achieved in the 2008 reforms.
• Once in effect, India and Brazil will join China and
Russia as part of the top 10 shareholders of the IMF.

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• The 24-member Executive Board also agreed on a
restructuring of the way it operates, paving the
way for an increase in the representation of
dynamic emerging market and developing
countries in the day-to-day decision-making at
the IMF.
• There will be two fewer Board members from
advanced European countries, and all Executive
Directors will be elected rather than appointed,
as some are now. The size of the Board will
remain at 24, and its composition will be
reviewed every 8 years.
• The Board of Governors has called on member
countries to ratify these reforms by the time of
the 2012 Annual Meetings
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• Reform of IMF governance to better reflect the global
economy
• A top priority for the IMF’s legitimacy and effectiveness
has been the completion of governance reform.
• On December 15, 2010, the Board of Governors
approved far-reaching governance reforms under
the 14th General Review of Quotas. The package
included a doubling of quotas, with a more than a 6
percentage point shift in quota share to dynamic
emerging market and developing countries while
protecting the voting shares of the poorest member
countries. The reform also included a move to a more
representative, fully elected Executive Board and
advanced European countries committed to reduce
their combined Executive Board representation by two
chairs.

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• The reforms became effective on January 26, 2016, with
the entry into force of the amendment to the IMF’s Articles
of Agreement that created an all-elected Executive Board,
after it had been accepted by three-fifths (or 113) of the
189 member countries having 85 percent of the total voting
power.
• The 2010 reforms built on quota and voice reforms agreed
in April 2008 and became effective on March 3, 2011.
Under these reforms, 54 members received an increase in
their quotas—with China, Korea, India, Brazil, and Mexico
as the largest beneficiaries. Another 135 members,
including low-income countries, saw an increase in their
voting power as a result of the increase in basic votes,
which will remain a fixed percentage of total votes.
Combined with the 14th Review, the shift in quota share to
dynamic emerging market and developing countries is 9
percentage points.

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• Elements of the Governance Reform
• The Fund’s governance structure must keep pace
with the rapidly evolving world economy to
ensure it remains an effective and representative
institution of all of its 189 member countries. To
secure this objective, in December 2010 the
Board of Governors of the IMF approved a
package of far-reaching reforms of the Fund's
quotas and governance. These reforms, which
became effective on January 26, 2016 represent a
major realignment in the ranking of quota shares
that better reflects global economic realities, and
a strengthening in the Fund’s legitimacy and
effectiveness.

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• The elements of the reform include
• i) A quota increase and shift in shares. The 14th
General Review of Quotas resulted in an
unprecedented doubling of quotas and a major
realignment of quota and voting shares to emerging
and developing countries (with a more than 6 percent
quota shift to dynamic emerging market and
developing countries and under-represented
countries).
• ii) Protecting the voting power of the poorest. The
quota shares and voting power of the poorest
members were preserved.
• iii) Quota formula and next review. A
comprehensive review of the current quota
formula and bringing forward the completion of the
15th General Review of Quotas to January 2014.

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• iv) A new composition and more representative
Board.
• The 2010 reforms also included an amendment to the
Articles of Agreement that facilitates a move to a more
representative, all-elected Executive Board.
• Following the 2016 regular election of Executive
Directors all 24 Executive Directors will be elected, and
take office as of November 1, 2016. The size of the
Board will remain at 24, and its composition will be
reviewed every 8 years. The European members are
committed to reducing by two the number of Board
members representing advanced European countries in
favor of emerging market and developing countries,
and have made significant progress.

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• The Bretton Woods agreement
• The IMF was conceived in July 1944, when
representatives of 45 countries met in the town
of Bretton Woods, New Hampshire, in the
northeastern United States
• These countries agreed on a framework for
international economic cooperation, to be
established after the Second World War.
• They believed that such a framework was
necessary to avoid a repetition of the disastrous
economic policies that had contributed to the
Great Depression.
• The IMF came into formal existence in December
1945, when its first 29 member countries signed
its Articles of Agreement.
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• It began operations on March 1, 1947. Later that year,
France became the first country to borrow from the
IMF on May 8th and May 9th 1947 respectively. .
• The IMF's membership began to expand in the late
1950s and during the 1960s as many African countries
became independent and applied for membership.
• But the Cold War limited the Fund's membership, with
most countries in the Soviet sphere of influence not
joining.
• More recently, with the 1991 dissolution of the Soviet
Union most countries in the Soviet Sphere of influence
joined the IMF.
• IMF currently has 189 countries.

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 Purpose of IMF

• The purposes of the IMF are set in Article 1 as follows:

• To promote international monetary cooperation through a
permanent institution which provides the machinery for
consultation and collaboration on international monetary
problems
• To facilitate the expansion and balanced growth of
international trade, and to contribute thereby to the
promotion and maintenance of high levels of employment
and real income and to the development of the productive
resources of all members as primary objectives of
economic policy
• To promote exchange stability, to maintain orderly
exchange arrangements among members, and to avoid
competitive exchange depreciation

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• To assist in the establishment of a multilateral system
of payments in respect of current transactions
between members and in the elimination of foreign
exchange restrictions which hamper the growth of
world trade
• To give confidence to members by making the
general resources of the Fund temporarily available
to them under adequate safeguards, thus providing
them with opportunity to correct maladjustments in
their balance of payments without resorting to
measures destructive of national or international
prosperity
• In accordance with the above, to shorten the
duration and lessen the degree of disequilibrium in
the international balances of payments of members

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• Historical Examination of the Metamorphosis of the
Influence of the IMF

• Cooperation and reconstruction (1944–71)

• The IMF adopted Par value system
• The countries that joined the IMF between 1945 and 1971
agreed to keep their exchange rates (the value of their
currencies in terms of the U.S. dollar and, in the case of the
United States, the value of the dollar in terms of gold)
pegged at rates that could be adjusted only to correct a
"fundamental disequilibrium" in the balance of payments,
and only with the IMF's agreement.
• This par value system—also known as the Bretton Woods
system—prevailed until 1971, when the U.S. government
suspended the convertibility of the dollar (and dollar
reserves held by other governments) into gold.

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 The End of the Bretton Woods System (1972–81)

• By the early 1960s, the U.S. dollar's fixed value

against gold, under the Bretton Woods system of
fixed exchange rates, was seen as overvalued.
• A sizable increase in domestic spending on
President Lyndon Johnson's Great Society
programs and a rise in military spending caused
by the Vietnam War gradually worsened the
overvaluation of the dollar.
• The system dissolved between 1968 and 1973. In
August 1971, U.S. President Richard Nixon
announced the "temporary" suspension of the
dollar's convertibility into gold.

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• While the dollar had struggled throughout most of the
1960s within the parity established at Bretton Woods,
this crisis marked the breakdown of the system. An
attempt to revive the fixed exchange rates failed, and
by March 1973 the major currencies began to float
against each other.
• Since the collapse of the Bretton Woods system, IMF
members have been free to choose any form of
exchange arrangement they wish (except pegging their
currency to gold):
– allowing the currency to float freely,
– pegging it to another currency or a basket of currencies,
– adopting the currency of another country,
– participating in a currency bloc, or
– forming part of a monetary union.
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• Debt and Painful Reforms (1982–89)

• The oil shocks of the 1970s, which forced many

oil-importing countries to borrow from
commercial banks, and the interest rate increases
in industrial countries trying to control inflation
led to an international debt crisis.
• During the 1970s, Western commercial banks lent
billions of "recycled" petrodollars, getting
deposits from oil exporters and lending those
resources to oil-importing and developing
countries, usually at variable, or floating, interest
rates.
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• So when interest rates began to soar in 1979, the floating
rates on developing countries' loans also shot up. Higher
interest payments are estimated to have cost the non-oil-
producing developing countries at least $22 billion during
1978–81. At the same time, the price of commodities from
developing countries slumped because of the recession
brought about by monetary policies. Many times, the
response by developing countries to those shocks included
expansionary fiscal policies and overvalued exchange rates,
sustained by further massive borrowings.
• When a crisis broke out in Mexico in 1982, the IMF
coordinated the global response, even engaging the
commercial banks. It realized that nobody would benefit if
country after country failed to repay its debts.
• The IMF's initiatives calmed the initial panic and defused its
explosive potential. But a long road of painful reform in the
debtor countries, and additional cooperative global
measures, would be necessary to eliminate the problem.

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Societal Change for Eastern Europe and Asian
Upheaval (1990-2004
• The fall of the Berlin wall in 1989 and the
dissolution of the Soviet Union in 1991 enabled the
IMF to become a (nearly) universal institution. In
three years, membership increased from 152
countries to 172, the most rapid increase since the
influx of African members in the 1960s.
• In order to fulfil its new responsibilities, the
Executive Board increased from 22 seats to 24 to
accommodate Directors from Russia and
Switzerland, and some existing Directors saw their
constituencies expand by several countries.
• The IMF played a central role in helping the
countries of the former Soviet bloc transition from
central planning to market-driven economies.
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• By the end of the decade, most economies in transition had
successfully graduated to market economy status after
several years of intense reforms, with many joining the
European Union in 2004.

• Asian Financial Crisis

• In 1997, a wave of financial crises swept over East Asia,
from Thailand to Indonesia to Korea and beyond. Almost
every affected country asked the IMF for both financial
assistance and for help in reforming economic policies.
• From this experience, the IMF drew several lessons:
- First, it paid more attention to weaknesses in
countries’ banking sectors and to the effects of those
weaknesses on macroeconomic stability. In 1999, the
IMF/World Bank launched the Financial Sector
Assessment Program for national assessments on a
voluntary basis.

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Second, the Fund realized that the institutional
prerequisites for successful liberalization of
international capital flows were more daunting
than it had previously thought.
- Third, the severity of the contraction in economic
activity that accompanied the Asian crisis
necessitated a re-evaluation of how fiscal policy
should be adjusted when a crisis was
precipitated by a sudden stop in financial inflows.
• Debt relief for poor countries
• During the 1990s, the IMF worked closely with the
World Bank to alleviate the debt burdens of poor
countries through the Heavily Indebted Poor Countries
(1996) and the Multilateral Debt Relief Initiative
(MDRI). (2005)
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 Functions
• Upon initial IMF formation, to oversee the fixed
exchange rate arrangements between countries, thus
helping national governments manage their exchange
rates and allowing these governments to prioritize
economic growth.
• To provide short-term capital to aid balance of
payments. This assistance was meant to prevent the
spread of international economic crises.
• The IMF’s role was fundamentally altered after the
floating exchange rates post 1971 as it shifted to
examining the economic policies of countries with IMF
loan agreements to determine if a shortage of capital
was due to economic fluctuations or economic policy.
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• To research what types of government policy
would ensure economic recovery. The new
challenge is to promote and implement policy
that reduces the frequency of crises among the
emerging market countries, especially the
middle-income countries that are open to
massive capital outflows.
• Rather than maintaining a position of oversight of
only exchange rates, their function became one
of “surveillance” of the overall macroeconomic
performance of its member countries. Their role
became a lot more active because the IMF now
manages economic policy instead of just
exchange rates.

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• To foster global growth and economic stability.
• To provide policy advice and financing to
members in economic difficulties.
• Works with developing nations to help them
achieve macroeconomic stability and reduce
poverty. The rationale for this is that private
international capital markets function imperfectly
and many countries have limited access to
financial markets. The IMF can provide other
sources of financing to countries in need that
would not be available in the absence of an
economic stabilization program supported by the
Fund.

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• The Process Of IMF Lending
• Upon request by a member country, IMF resources are
usually made available under a lending ―arrangement,
which may, depending on the lending instrument used,
stipulate specific economic policies and measures a country
has agreed to implement to resolve its balance of payments
problem.
• The economic policy program underlying an arrangement is
formulated by the country in consultation with the IMF and
is in most cases presented to the Fund‘s Executive Board in
a ―Letter of Intent.
• Once an arrangement is approved by the Board, IMF
resources are usually released in phased installments as the
program is implemented. Some arrangements provide
strong-performing countries with a one-time up-front
access to IMF resources and thus not subject to the
observance of policy understandings.

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• IMF Lending Instruments
• Over the years, the IMF has developed various
loan instruments that are tailored to address
the specific circumstances of its diverse
membership.
• These are categorized as :
- Concessional Loans
- Non-concessional Loans
- Emergency Assistance

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 1) Concessional Loan :
• a) The Extended Credit Facility (ECF)
- The Fund‘s main tool for providing medium-term
support to LICs with protracted balance of payments
problems. Financing under the ECF currently carries a
zero interest rate, with a grace period of 5½ years, and
a final maturity of 10 years.
• b) The Standby Credit Facility (SCF)
- Provides financial assistance to LICs with short-
term balance of payments needs. The SCF can be used
in a wide range of circumstances, including on a
precautionary basis. Financing under the SCF currently
carries a zero interest rate, with a grace period of 4
years, and a final maturity of 8 years.

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• c) The Rapid Credit Facility (RCF)
• provides rapid financial assistance with limited
conditionality to LICs facing an urgent balance
of payments need. The RCF streamlines the
Fund‘s emergency assistance for LICs, and can
be used flexibly in a wide range of
circumstances. Financing under the RCF
currently carries a zero interest rate, has a
grace period of 5½ years, and a final maturity
of 10 years.
• Concessional loans carry zero interest rates
until the end of 2013 (2012 for SCF loans).

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II: Non-concessional Loans :
• a) Stand-By Arrangements (SBA)
- The bulk of non-concessional IMF assistance is
provided through SBAs. The SBA is designed to help
countries address short-term balance of payments
problems. Program targets are designed to address
these problems and disbursements are made
conditional on achieving these targets (‘conditionality‘).
The length of a SBA is typically 12–24 months, and
repayment is due within 3¼-5 years of disbursement.
SBAs may be provided on a precautionary basis—where
countries choose not to draw upon approved amounts
but retain the option to do so if conditions deteriorate—
both within the normal access limits and in cases of
exceptional access. 45
• b) The Flexible Credit Line (FCL)
The FCL is for countries with very strong
fundamentals, policies, and track records of
policy implementation and is useful for both
crisis prevention and crisis resolution.
• FCL arrangements are approved, at the
member country‘s request, for countries
meeting pre-set qualification criteria.
• The length of the FCL is one or two years (with
an interim review of continued qualification
after one year) and the repayment period is
the same as for the SBA.

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• Access is determined on a case-by-case basis, is not
subject to the normal access limits, and is available
in a single up-front disbursement rather than
phased.
• Disbursements under the FCL are not conditional
on implementation of specific policy
understandings as is the case under the SBA
because FCL-eligible countries are trusted to be
able to implement appropriate macroeconomic
policies.
• There is flexibility to either draw on the credit line
at the time it is approved or treat it as
precautionary.
• In case a member country draws, the repayment
term is the same as that under the SBA.

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• c) Precautionary and Liquidity Line (PLL).
- The PLL can be used for both crisis prevention and
crisis resolution purposes by countries with sound
fundamentals and policies, and a track record of
implementing such policies. PLL-eligible countries may
face moderate vulnerabilities and may not meet the FCL
qualification standards, but they do not require the same
large-scale policy adjustments normally associated with
SBAs. Duration of PLL arrangements can be either six
months or 1-2 years. Access under the six-month PLL is
limited to 250 percent of quota in normal times, but this
limit can be raised to 500 percent of quota in exceptional
circumstances where the balance of payments need is
due to exogenous shocks, including heightened regional
or global stress. 1-2 year PLL arrangements are subject to
an annual access limit of 500 percent of quota and a
cumulative limit of 1000 percent of quota. The
repayment term of the PLL is the same as for the SBA.
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• d) Extended Fund Facility (EFF).
• This facility was established in 1974 to help countries
address medium- and longer-term balance of payments
problems reflecting extensive distortions that require
fundamental economic reforms.
• Arrangements under the EFF are thus longer than SBAs—
normally not exceeding three years at approval, with a
maximum extension of up to one year where appropriate.
• However, a maximum duration of up to four years at
approval is also allowed, predicated on the existence of a
balance of payments need beyond the three-year period,
the prolonged nature of the adjustment required to restore
macroeconomic stability, and the presence of adequate
assurances about the member‘s ability and willingness to
implement deep and sustained structural reforms.
• Repayment is due within 4½–10 years from the date of
disbursement.

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III: Emergency Assistance Loan
a) Rapid Financing Instrument (RFI).
- The RFI was introduced to replace and
broaden the scope of the earlier emergency
assistance policies. The RFI provides rapid
financial assistance with limited conditionality to
all members facing an urgent balance of
payments need. Access under the RFI is subject to
an annual limit of 50 percent of quota and a
cumulative limit of 100 percent of quota.
Emergency loans are subject to the same terms
as the FCL, PLL and SBA, with repayment within
3¼–5 years.
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• NOTE:
• All non-concessional facilities are subject to the IMF‘s
market-related interest rate, known as the ―rate of
charge, and large loans (above certain limits) carry a
surcharge. The rate of charge is based on the SDR
interest rate, which is revised weekly to take account of
changes in short-term interest rates in major
international money markets. The maximum amount
that a country can borrow from the IMF, known as its
access limit, varies depending on the type of loan, but
is typically a multiple of the country‘s IMF quota. This
limit may be exceeded in exceptional circumstances.
The Stand-By Arrangement, the Flexible Credit Line and
the Extended Fund Facility have no pre-set cap on
access.

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• Benefits of IMF Membership
• i) Member countries of the IMF have access to
information on the economic policies of all
member countries.
• ii) The opportunity to influence other
members’ economic policies.
• iii) Technical assistance in banking, fiscal
affairs, and exchange matters.
• iv) Financial support in times of payment
difficulties, and;
• v) Increased opportunities for trade and
investment
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• Voting and Quota Powers
• Voting power in the IMF is based on a quota system.
• Quota subscriptions are a central component of the
IMF’s financial resources. Each member country of the
IMF is assigned a quota, based broadly on its relative
position in the world economy. A member country’s
quota determines its maximum financial commitment
to the IMF, its voting power, and has a bearing on its
access to IMF financing.
• When a country joins the IMF, it is assigned an initial
quota in the same range as the quotas of existing
members of broadly comparable economic size and
characteristics. The IMF uses a quota formula to help
assess a member’s relative position.

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• The current quota formula is a weighted average of
GDP (weight of 50 percent), openness (30 percent),
economic variability (15 percent), and international
reserves (5 percent). For this purpose, GDP is
measured through a blend of GDP—based on market
exchange rates (weight of 60 percent) and on PPP
exchange rates (40 percent). The formula also includes
a “compression factor” that reduces the dispersion in
calculated quota shares across members.
• Quotas are denominated in Special Drawing Rights
(SDRs), the IMF’s unit of account. The largest member
of the IMF is the United States, with a current quota (as
of September 12, 2016) of SDR 82.99 billion (about
US$116 billion), and the smallest member is Tuvalu,
with a quota of SDR 2.5 million (about US$3.5 million).

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• Key Roles of Quotas in the IMF
• A member's quota determines that country’s
financial and organizational relationship with the
IMF, including:
i) Subscriptions . A member's quota subscription
determines the maximum amount of financial
resources the member is obliged to provide to
the IMF. A member must pay its subscription in
full upon joining the Fund: up to 25 percent must
be paid in SDRs or widely accepted currencies
(such as the U.S. dollar, the euro, the yen, or the
pound sterling), while the rest is paid in the
member's own currency.

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• ii) Voting power . The quota largely determines a
member's voting power in IMF decisions. Each IMF
member’s votes are comprised of basic votes plus one
additional vote for each SDR 100,000 of quota. The
2008 reform fixed the number of basic votes at 5.502
percent of total votes. The current number of basic
votes represents close to a tripling of the number prior
to the implementation of the 2008 reforms.
iii) Access to financing . The amount of financing a
member can obtain from the IMF (its access limit) is
based on its quota. For example, under Stand-By and
Extended Arrangements, a member can borrow up to
145 percent of its quota annually and 435 percent
cumulatively. However, access may be higher in
exceptional circumstances.

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• Effects of the quota system
• The IMF’s quota system was created to raise funds for
loans.
• Each IMF member country is assigned a quota, or
contribution, that reflects the country’s relative size in the
global economy.
• Each member’s quota also determines its relative voting
power. Thus, financial contributions from member
governments are linked to voting power in the organization.
• This system follows the logic of a shareholder-controlled
organization: wealthy countries have more say in the
making and revision of rules.
• Since decision making at the IMF reflects each member’s
relative economic position in the world, wealthier countries
that provide more money to the fund have more influence
in the IMF than poorer members that contribute less;
nonetheless, the IMF focuses on redistribution.

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• Special Drawing Rights (SDRs)
The SDR is an international reserve asset, created by the
IMF in 1969 to supplement its member countries' official
reserves. Its value is based on a basket of four key
international currencies, and SDRs can be exchanged for
freely usable currencies. With a general SDR allocation that
took effect on August 28 and a special allocation
on September 9, 2009, the amount of SDRs increased from
SDR 21.4 billion to around SDR 204 billion (equivalent to
about $310 billion, converted using the rate of August 20,
2012).
• The role of the SDR
• The SDR was created by the IMF in 1969 to support the
Bretton Woods fixed exchange rate system. A country
participating in this system needed official reserves—
government or central bank holdings of gold and widely
accepted foreign currencies—that could be used to
purchase the domestic currency in foreign exchange
markets, as required to maintain its exchange rate.
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• But the international supply of two key reserve
assets—gold and the U.S. dollar—proved
inadequate for supporting the expansion of world
trade and financial development that was taking
place. Therefore, the international community
decided to create a new international reserve
asset under the auspices of the IMF.
• However, only a few years later, the Bretton
Woods system collapsed and the major
currencies shifted to a floating exchange rate
regime. In addition, the growth in international
capital markets facilitated borrowing by
creditworthy governments. Both of these
developments lessened the need for SDRs.

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• The SDR is neither a currency, nor a claim on
the IMF. Rather, it is a potential claim on the
freely usable currencies of IMF members.
• Holders of SDRs can obtain these currencies in
exchange for their SDRs in two ways:
– first, through the arrangement of voluntary
exchanges between members; and,
– second, by the IMF designating members with
strong external positions to purchase SDRs from
members with weak external positions.
• In addition to its role as a supplementary reserve
asset, the SDR serves as the unit of account of the
IMF and some other international organizations.

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• Criticisms of IMF
• IMF has been a subject of criticisms on a wide range of
issues.
• We shall be looking at some of these criticisms.
• 1) Conditions of IMF Loans
• IMF has been criticized for creating an immoral system
of modern day colonialism that SAPs the poor.
• On giving loans to countries, IMF makes the loan
conditional on the implementation of certain economic
and structural adjustment policies (SAPs) that entail:
– cutting down on government spending on education
and health;
– Reducing government borrowing which involves
higher taxes and lower spending;

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 – removing basic food and transportation subsidies;
– devaluing national currencies to make exports
cheaper;
– Privatizing and commercializing national assets;
– freezing wages;
– Higher interest rates to stabilize the currency; and,
– Allowing failing firms to go bankrupt.
• The problem is that these policies of structural
adjustment and macro economic intervention make
the situation worse.

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• Such belt-tightening measures:
– increase poverty;
– reduce countries' ability to develop strong
domestic economies; and,
– allow multinational corporations to exploit
workers and the environment
• A recent IMF loan packages for indebted
countries often insist on cutting salaries and
allowances of public sector workers as well as
freezing salaries and decreases in social
security payments.
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• 2) Imposition of Flawed Development Model
• IMF has been accused of imposing a
fundamentally flawed development model.
• Unlike the path historically followed by the
industrialized countries, the IMF forces countries
from the Global South to prioritize export
production over the development of diversified
domestic economies.
• Nearly 80 percent of all malnourished children in
the developing world live in countries where
farmers have been forced to shift from food
production for local consumption to the
production of export crops destined for wealthy
countries.

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• The IMF also requires countries to eliminate assistance
to domestic industries while providing benefits for
multinational corporations -- such as forcibly lowering
labor costs making it difficult for small businesses and
farmers to compete.
• Sweatshop* workers in free trade zones set up by the
IMF and World Bank earn starvation wages, live in
deplorable conditions, and are unable to provide for
their families.
• The cycle of poverty is perpetuated, not eliminated, as
governments' debt to the IMF grows.
• *Sweatshop is a workplace with overworked,
underpaid employees; that is, a small factory or other
establishment where employees are made to work very
hard in poor conditions for low wages
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• 3) IMF bailouts deepen, rather then solve, economic crisis
• During financial crises -- such as with Mexico in 1995 and
South Korea, Indonesia, Thailand, Brazil, and Russia in 1997
-- the IMF stepped in as the lender of last resort.
• Yet the IMF bailouts in the Asian financial crisis did not stop
the financial panic -- rather, the crisis deepened and spread
to more countries.
• The policies imposed as conditions for these loans were
bad medicine, causing layoffs in the short run and
undermining development in the long run.
• In South Korea, the IMF sparked a recession by raising
interest rates, which led to more bankruptcies and
unemployment.
• Under the IMF imposed economic reforms after the peso
bailout in 1995, the number of Mexicans living in extreme
poverty increased more than 50 percent and the national
average minimum wage fell 20 percent.

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• 4) IMF Policies Hurt the Environment
• IMF loans and bailout packages are paving the
way for natural resource exploitation on a
staggering scale.
• The IMF does not consider the environmental
impacts of lending policies, and environmental
ministries and groups are not included in policy
making.
• The focus on export growth to earn hard currency
to pay back loans has led to an unsustainable
liquidation of natural resources.
• For example, the Ivory Coast's increased reliance
on cocoa exports has led to a loss of two-thirds of
the country's forests.

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• 5) Loss of National Sovereignty
• IMF conditionalities result in the loss of a state’s authority
to govern its own economy as national economic policies
are predetermined under IMF packages.
• IMF packages have also been associated with negative
social outcomes such as reduced investment in public
health and education.
• 6)
• With the World Bank, there are concerns about the types
of development projects funded. Many infrastructure
projects financed by the World Bank Group have social and
environmental implications for the populations in the
affected areas and criticism has centred on the ethical
issues of funding such projects. For example, World Bank-
funded construction of hydroelectric dams in various
countries has resulted in the displacement of indigenous
peoples of the area.

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• 7) IMF policies promote corporate welfare
• To increase exports, countries are encouraged to give
tax breaks and subsidies to export industries.
• Public assets such as forestland and government
utilities (phone, water and electricity companies) are
sold off to foreign investors at rock bottom prices.
• In Guyana, an Asian owned timber company called
Barama received a logging concession that was 1.5
times the total amount of land all the indigenous
communities were granted. Barama also received a
five-year tax holiday.
• The IMF forced Haiti to open its market to imported,
highly subsidized US rice at the same time it prohibited
Haiti from subsidizing its own farmers. A US
corporation called Early Rice now sells nearly 50
percent of the rice consumed in Haiti.

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• 8) IMF lending encourages "moral hazard“
• "Moral hazard" is a term that denotes the idea that
insurance makes people incautious. In other words, it is
the tendency of people who are insured against a
specific hazard to cease to exercise caution to avoid the
hazard.
• With regards to IMF lending, critics argue that the
knowledge that IMF financing will be made available in
the event of a financial crisis makes the crisis more
likely to occur.
• Put differently, the possibility of getting bailed out
encourages countries to borrow more.
• The idea is that creditors know that IMF financing helps
crisis-prone countries stave off default and are
therefore willing to lend to such countries at lower
interest rate spreads than would prevail if the IMF did
not exist.
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• IMF's presence thus weakens pressure on
governments to pursue policies—such as
sustainable fiscal policies and sound financial
supervision and regulation—that could help
prevent crises.
• Associated with this view is the suggestion that
moral hazard may have increased in recent years.
It has been argued, in particular, that the IMF's
response to Mexico's crisis in early 1995 signaled
a new era of massive "bailouts" that inspired
higher levels of risk taking and set the stage for
crises in East Asia, Russia, and Brazil just a few
years later.

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• 9) The IMF serves wealthy countries and Wall Street
• Unlike a democratic system in which each member
country would have an equal vote, rich countries
dominate decision-making in the IMF because voting
power is determined by the amount of money that
each country pays into the IMF's quota system.
• It's a system of one dollar, one vote. The U.S. is the
largest shareholder with a quota of 18 percent.
Germany, Japan, France, Great Britain, and the US
combined control about 38 percent. The
disproportionate amount of power held by wealthy
countries means that the interests of bankers, investors
and corporations from industrialized countries are put
above the needs of the world's poor majority.

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• 10) Criticisms of the Neo Liberal basis of IMF
• Critics contend that the neoliberal basis of IMF
has far-reaching implications, namely:
– critics point out the contradiction between ‘free
market reforms’ and attempts to influence
exchange rates.
– Critics argue that IMF hurts workers. The IMF and
World Bank frequently advise countries to attract
foreign investors by weakening their labor laws --
eliminating collective bargaining laws and
suppressing wages, for example. The IMF's mantra
of "labor flexibility" permits corporations to fire at
whim and move where wages are cheapest.

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– Critics also contend that IMF policies hurt women
the most. SAPs make it much more difficult for
women to meet their families' basic needs. When
education costs rise due to IMF-imposed fees for
the use of public services (so-called "user fees")
girls are the first to be withdrawn from schools.
User fees at public clinics and hospitals make
healthcare unaffordable to those who need it
most. The shift to export agriculture also makes it
harder for women to feed their families. Women
have become more exploited as government
workplace regulations are rolled back and
sweatshops abuses increase.

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